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Analysis Paralysis: The Cost of Inaction

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When faced with too much information and too may options many people take the easy road, which is doing nothing. This is called analysis paralysis – you are frozen by having too many options and no clear answers.

Inertia can cause many personal and financial problems, so let’s take a look at how we can get past analysis paralysis and make positive progress toward our personal and financial goals.

Example: The Cost of Inaction

One of the most frequent comments and emails I receive is from first time investors who want to know where they should invest first. This is understandable – there are literally thousands of investment options, as stock funds, mutual funds, real estate, and many different investments vehicles such as savings accounts, CDs, 401Ks, IRAs, and more. Unfortunately, many people don’t know where to start investing so they take the easiest route – they don’t invest.

That is the wrong way to think! Compound interest is one of the most powerful forces in the world, and over time, can make you a lot of money! Instead of leaving your money on the sidelines and not investing, put your money to work for you. Still don’t know where to start? Let’s take a look at how we can get beyond analysis paralysis and make progress toward our goals.

Spurring Action: How to get beyond Analysis Paralysis

I’m going to stick with the investing example, but I am going to apply principles you can use in other areas of life as well, including your personal life, finances, choosing an MBA program, career opportunities, business opportunities, etc. The following steps can help you narrow your options, eliminate the noise, and do the necessary research to take action.

Define Your Objectives

The first step in any process is to define your goals and objectives. You will find it difficult to measure progress and ensure you are on the right track if you don’t know where you are going. This principle applies to most topics, including investing.

Investing is a broad topic with many applications: invest for short term or long term, retirement, cash flow, wealth building, and more. The more specific you define your objectives, the easier it will be to reduce the noise and eliminate options that don’t meet your needs. Let’s use the example of retirement investing.

List and Categorize Your Options

Once your objectives are defined, you can easily narrow your options. List all the options that might apply to your objectives. At this point we’re not looking for in depth research; we only want to do enough to know whether or not the line item can meet our objective.

There are many investment vehicles, some of which are designed specifically for retirement. Make a list of all the retirement plan options you can find.

Eliminate Options

The next step is to remove the options that won’t help you reach your goals. Initially, you may find it easier to look for reasons an item doesn’t meet your objectives. Great! Do anything you can to make this step easier.

Look at your list of retirement plan options. If you created a thorough list, you probably have things listed such as self-employed retirement plans, Traditional and Roth IRAs, 401k plans, 403b plans, Thrift Savings Plan, etc. Cross any off the list that don’t meet your needs. If you are not self-employed, or are not eligible for some other retirement plan options because of contribution limits or because you don’t meet eligibility requirements, then you can eliminate those options from your list.

Research Your Options

By now you should have a reasonably short list of options that will help you reach your goals. This is where you will focus the majority of your time. Be organized and methodical with your research and list pros and cons to each option. You may also consider running a SWOT Analysis on your options to determine their strengths and weaknesses.

Going back to retirement investing, we can take a more in depth look at our retirement plan options and look for more information regarding which plan is best for our needs. Based on your situation you may have determined that you are not eligible for a deductible Traditional IRA, but you meet the Roth IRA income limits and you also have access to a 401k plan. If you can’t afford to contribute to both plans, then compare Roth IRAs and 401k plans and determine which is best for your investment needs.

Lights, Camera, ACTION!

If you have done a thorough job with these steps then you should have a clear objective, a list of viable options, and the research to back it up. You will also be well versed in your new topic and should know where to go should you need a backup plan.

Keep in mind that you may need to repeat this process more than once to reach your final goal. Let’s say you decided you wanted to invest in a Roth IRA. Once you make that decision you can repeat the process to find the best place to open an IRA, determine how to open an IRA, and then again to decide how to invest your funds.

The final step is to use your research to create an action plan and follow through with it.

Overcoming Analysis Paralysis

Sitting on the sidelines is great if you are watching a baseball game. But in real life you need to get out there and make things happen. Instead of letting too much information paralyze you into inaction, learn to focus on what is important. Define your goals, list your options, eliminate the noise, do more research, then choose the option that best meets your needs.

Analysis paralysis is a real and dangerous phenomena that can prevent you from achieving your goals. But it can also be avoided with some thoughtful planning and methodical action.


Published or updated May 23, 2011.
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{ 6 comments… read them below or add one }

1 RetirementInvestingToday

Personally I think people just need to realise there is no ‘right’ or ‘wrong’ answer to investing, only doing whats right for you. How many people can say they have ever been on the efficient frontier of investing. I know I never have and accept that I probably never will be. If you haven’t been there then you haven’t been ‘right’ although you may have still been successful.

That combined with understanding compound interest (which IMO should be taught at school every year), as you highlight, gets you half way there.

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2 ctreit

You bring up some very good examples when doing nothing can be expensive. But sometimes we really face such an overload of information that it is very difficult to do anything. Think about a simpler act like buying a car. We reduce such a complicated act into some pretty simple things so that we can make a decision. So, in case like the ones you list it is probably a good idea to do something, anything just to get the ball rolling. We do the same thing when we buy a car. However, at other times it may be a good idea to do nothing like Steadfast Finances argues in this blog post: http://steadfastfinances.com/blog/2009/06/20/sometimes-the-hardest-and-wisest-thing-to-do-is-todo-nothing/

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3 Ryan

ctreit, I agree 100%. Last year I wrote about a similar situation when I came upon a great business idea, but one I didn’t have the time or energy to pull off. I shared a little about that situation here: The Best Business Opportunity Can Be the One You Don’t Take.

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4 Manshu

Great post Ryan. Although I see ctreit’s point and agree with it to some extent, I have personally felt that each decision I delayed has just cost me more. I guess it has something to do with mental make up too. I can’t learn anything without trying it myself, so I have a tendency to get on with things as quickly as possible.

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5 Ryan

There are times when it’s best not to act, and I think ctreit made a good point by bringing that up. I think the main thing is to make a conscious decision based on research, and not simply sit out because you are too intimidated to do anything. Hopefully, using these principles will help people better differentiate those times when it is best to act, or best to stay on the sidelines.

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6 Ron

Love that you mentioned methodical action. I believe taking those *constant* and regular small steps are what gets you places. Sure, there are big leaps here and there, but continuing that momentum with methodical actions will get you further than any grandiose ideas that usually never get implemented.

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